Claiming excessive fees charged to participants in NYLife’s DC plan for a proprietary S&P 500 fund, participants in the plan settled for a reported $3 million in the latest spike in litigation against defined contribution (DC) plans. Over the last 18 months, 38 ERISA cases have been filed with more likely due to the DOL’s conflict of interest rule which is still on track to become effective April 10, 2017.
While most of the cases have been filed against plans with $2 billion or more, smaller plans are being targeted based on the success against larger plans. And 403b plans have also been targeted especially vulnerable with multiple record keepers and more investment choices than most 401ks limiting buying power. The issue of whether hospitals associated with churches are so-called “church” plans has yet to be finalized while managed account providers like Financial Engines are also in the cross hairs of litigators.
The good news for providers and plan sponsors is that some cases like the one filed against Chevron for excessive fees have been dismissed and there’s no spike in fiduciary insurance costs.
Meanwhile, EBSA, the DOL’s enforcement arm, recovered $700 million in civil cases which represented 67% of the cases they filed in 2015 and started 275 criminal investigations.
No doubt that the surge in litigation, the DOL rule and a more aggressive regulator means that the stakes are getting higher for companies that sponsor an ERISA retirement plans like a 401k. Will companies be tempted to switch to a state-sponsored auto IRA plan not subject to ERISA which has lower costs and less work? Almost 10 states have passed laws with another 20 pending although recently proposed legislation may inhibit this movement.
Regardless, plan sponsors are more concerned about managing their fiduciary liability as the cost to defend lawsuits will cause many plans to settle, like NYLife, inviting more litigation.
